Foster’s not all beer and skittles

Foster’s was supposed to be the strong one, held back by its wine division’s spendthrift ways. But a week after the long-anticipated split, the new
Treasury Wine Estates
is moving on while
Foster’s
struggles to pick up the pieces.

In the past week Foster’s shares have tumbled nearly 7 per cent to close at $4.23 on Monday, while Treasury Wine has risen 7 per cent to $3.58.

Foster’s supporters argue the pure beer business won’t be single for long, as more than a few global brewers are eager to get together.

But would-be suitors are wary of making an offer while the Australian dollar is trading near record highs.

Investors, meanwhile, are cautious about paying a premium for a takeover offer that might never eventuate.

Foster’s says it has changed its ways, and many investors are willing to give the new management a chance.

After years of being distracted by the struggling wine business, shareholders are keen to see what can be achieved with a fresh focus on efficiency, innovation and marketing.

Argo Investments is a major shareholder in Foster’s. Its chief executive, Jason Beddow, said the company had plenty of scope for improvement.

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“Management have been distracted by wine but if they can deliver on some internal cost savings and operational improvements and get their operation to Coca-Cola level of efficiency, that will certainly help them," he said.

“I think existing shareholders will give new management the benefit of the doubt for a while."

Bearish investors say Foster’s is too expensive. But those complaints won’t last if the shares continue to suffer the losses they have in the past week.

Just after the split Foster’s was trading on a one-year forward price-earnings multiple of 16 times. By yesterday the ratio had fallen to 13 times next year’s earnings.

Perhaps most worrying of all, Australians seem to be losing their taste for beer. Researcher Nielsen says sales volumes for domestic beer fell 6 per cent in the March quarter, compared with a year earlier.

Constellation Capital Management investment analyst Dan Nelson said consumers were moving away from beer in favour of spirits and wine. “I think the stock is a bit expensive, and there just doesn’t seem to be a lot of growth in beer volumes ahead," he said.

“I think [beer volumes] are in a long-term gradual downtrend."

Credit Suisse estimates beer volumes will increase in line with population growth over the medium term and that there could be an extra kick this year as sales bounce back from last summer’s wet weather. Beer prices tend to hug the consumer price index, making companies such as Foster’s a good inflation hedge.

The stock is paying a healthy net dividend yield of 6.4 per cent, which could lure defensive investors should the broader market continue to wobble.

But Foster’s is now caught in the middle of the supermarket war between Woolworths and the Wesfarmers-owned Coles.

Foster’s profit margins are coming under pressure as the supermarkets slash their prices, while private label beer is growing in popularity.

Earlier this year, Foster’s was forced to withhold supply from the supermarkets to protect the integrity of its brands after it caught Coles and Woolworths selling Victoria Bitter and Carlton Draught at below cost.

An increasing number of drinkers, meanwhile, are moving away from these stalwarts in favour of boutique or import beers.